12% 401(k) Contribution - What to do? [USA] ( kbin.social )

kersploosh , 5 months ago

The big advantage of putting your additional contributions into the 401(k) is that it reduces your taxable income. The big disadvantage is that the money is locked away for decades; that cash is no longer available to make big purchases like a car, honeymoon trip, etc. There are some exceptions, but be careful that you don’t get hit with penalties.

Personally, if I were in your situation, I would open a no-fee brokerage account and put you additional retirement money into an index fund that tracks the S&P 500 or NASDAQ. If you need the money before you turn 66 then it will be readily available.

yo_scottie_oh , 5 months ago

Better yet, put it in a Roth. OP can still withdraw the principal penalty-free if they need it, meanwhile it grows tax free.

sugar_in_your_tea , 5 months ago

can still withdraw

That’s subject to plan rules.

grows tax free

If you pay the same effective tax rate now vs retirement, Roth and tax-deferred are equivalent. The benefit of Roth is that it gives you flexibility in retirement, so you can choose how much taxes you pay in retirement instead of whatever you happen to withdraw from your tax-deferred accounts.

So a Roth contribution isn’t an automatic slam-dunk, it really depends on OP’s tax bracket now vs retirement. If OP is in the 12% or lower tax bracket, I highly recommend a Roth contribution, but if they’re above it, I recommend taking the deduction. I’m a little below the top of the 12% bracket, so I actually convert my old pre-tax accounts to Roth up to the top of the 12% bracket since that’s a pretty good tax rate to lock in.